Memorandum

To: Michelle Makaroff, President From: Kelsey Brewer Date: 3/6/2014 RE: convergence of GAAP and IFRS in accounting field Introduction: You requested that I delve further into recent issues that our accounting sector may be facing or will be facing in the future. I have gathered the following information for the most important issue I found which is the conjunction of the two regularly followed accounting standards, IFRS and GAAP. The following memo will highlight background information on the two practices, prove why this change is important to us, explain what progress has been made in the change, and provide reasons why we should alter to our inventory costing system. After analyzing various articles on the subject I believe that we must be more aware of standards expected under IFRS and restructure our inventory costing system by switching from LIFO to FIFO. What is IFRS and GAAP? As you may already know, two sets of accounting standards exist in the world today, GAAP (Generally Accepted Accounting Principles, which are most commonly used in the United States and IFRS (International Financial Reporting Standards) used amongst international businesses. According to Brginshaw, both documents outline what kind of statements should be shown on financial statements, how the numerical figures, should be calculated, and what additional details should be included. IFRS has been coined as more principles based than U.S. GAAP is which most regard has having a rule basis. GAAP allows certain preference to managers in deciding the structure accounting statements on some subjects like depreciation timescale and inventory costing methods, which can alter net income by hundreds of millions of dollar a year for big corporations. Why is the convergence important? According to the FASB the aim of this convergence is to construct a unified international accounting standard usable both domestically and overseas. Constructing global accounting standards that are compatible is highly important to countries like the United States on account that we do mass amounts of foreign business which require financial statements to be done using IFRS (FASB 1). This convergence will benefit those multi-national businesses that use outsourcing as a main production component, investors, financial reporters, and accountants by underlying what is expected from every business everywhere. Investors would be better served if all U.S. public companies used accounting standards promulgated by a single global standard setter as the basis for preparing their financial reports (Pacter 2). Not to mention the money saved by not being required to modify statements and calculations based on a different principle. This change will potentially strengthen and solidify the capital markets while making international relations easier.

What progress has been made? Starting in 2002, several small projects were constructed in order to little by little develop a common ground between the two standards. The FASB along with Pacter, and Bringinshaw reported that they are working with the IASB towards minimizing the or completely eliminating differences between the two standards. One of the largest milestones in the process is the decision that companies filing under IFRS are not required to adjust reconciliations according to revenue that would have been recognized under GAAP requirements. Issues amongst revenue recognition, financial instruments, and leases are still on the list of major topics to be reconciled in the near future. According to the article written by Paul Pacter, he believes that the convergence may not be a successful transition and the accounting world have been better off adopting IFRS from the start and believes eventually we will. Why should we eliminate LIFO? One major conflict amongst reconcilers of the merger is that IFRS does not allow practice of LIFO (Last in first out) method of inventory costing. As prices tend to rise this practice results in a high cost of goods sold expense, which depresses profits. Most U.S. companies use the LIFO method because it conveys tax advantages (Bringinshaw 1). Even though their net income might be higher, this cause more taxes to be imposed on the shareholders of the company. Not only will LIFO eventually phase out, but it could be detrimental to our company. What does this mean for our company?: The preceding memo explained the two different types of financial reporting and explained in detail that it is necessary to have a uniform policy of standards which the FASB and IASB have been working towards for years. Even though they are not in agreement on some matters LIFO will no longer be used. After analyzing the preceding articles I came to a conclusion. In response to the convergence I believe that it is in our best interest as a company to become more aware of this plan and update our financial recording methods as the decision prospers. Currently, we supply our product to five different foreign countries that practice IFRS. By implementing the new changes we could in turn save money and be prepared as the FASB makes the final decisions on this convergence. Secondly, we must discontinue the practice of LIFO inventory immediately. Even though there is still possibility for change in this process, LIFO will not be a method that will stay. In the past we have used this method because we appear to earn a higher net income. However, the end result hurts our stockholders by pushing higher taxes off on them which could hurt us in the long run. The change is inevitable and we must adapt as quickly as possible to thrive. What is the next step? This convergence is happening slowly but surely, to benefit some and to harm others. I believe that it is in our best interest to keep following this case clearly. It has always been big dreams to one day become a successful international business and this change is a tool that will aid us with that dream. I would like to schedule a meeting with you and the entire accounting sector to go over this information and discuss when we will start implementing the new changes regarding LIFO and IFRS. I will be sending an email regarding the time and place of the meeting at a later date. I have enclosed the articles that I summarized if you wish to acquire some additional information.

Works Cited Briginshaw, John. "Graziadio Business Review | Graziadio School of Business and Management | Pepperdine University." Graziadio Business Review Graziadio School of Business and Management Pepperdine University RSS. Pepperdine University, 2008. Web. 06 Mar. 2014. "FASB, Financial Accounting Standards Board." International Convergence of Accounting StandardsOverview. FASB, n.d. Web. 05 Mar. 2014. Pactor, Paul. "What Have IASB and FASB Convergence Efforts Achieved?" What Have IASB and FASB Convergence Efforts Achieved? Journal Of Accountancy, 2013. Web. 06 Mar. 2014.

Summary/Analysis The FASB (financial accounting standard board) produced an informative article that provides reasons why this convergence is important and how it goes along with their main responsibility to improve financial accounting standards for everyone that is involved. They believe this change is needed in order to create comparable standards that don't have drastic differences that can be followed universally. Their goal is to have one unified set of standards that are not only used for interbusiness relations but also between countries. Currently are mainly working towards eliminating differences between revenue recognition, leases, insurance, and financial instruments. The SEC is overseeing this joint effort at universality and reported that there are still a number of unresolved issues and potential costs and benefits to Americans. The article written by John Bringinshaw titled What Will The International Financial Reporting Standards (IFRS) Mean to Businesses and Investors? highlights the pros and cons of outright replacing GAAP with IFRS. He begins my explaining the difference between the two standards claiming that international standards give more leeway to mangers on recognizing revenue and possibly create and extra cost to businesses. On the other hand it could lower costs to Americans businesses engaging in overseas operations and prove to be a subject of little interest to domestic companies. He goes on to write that the practice of LIFO is one of the main points of disagreement between the IASB and FASB because it isnt accepted internationally and sees no place for it in the new standards because of how disadvantageous it would be to shareholders and would implement tax penalties. The article written by Paul Pacter, What have IASB and FASB convergence efforts achieved? provides short summaries of the small projects that the IASB and FASB have worked on reconciling through the merger. He remarks that the two boards are aiming towards making the two standards would be compatible with each other. He claims that the one of the biggest decisions made is in regards to not requiring companies to convert to GAAP when earnings were previously assessed under IFRS. When deciding which rule will be used from what standard the boards are making and effort to choose the most preferable practice and eliminate issues where there is much debate. He concludes by adding that adoption of one standard (IFRS) is the best case in this scenario and would eliminate debate and is the only way to achieve one simplified set of standards. One of the reasons I chose the article by FASB is because it is free from opinion and comes right from the source of the change. Important points to understand about this article is that in order to fulfill their mission to constantly improve accounting standard they needed this convergence in order to eliminate diversity and create something more simplified. This helps the clearly understand the call for change and just how beneficial it could be to large companies. The writing by John Briginshaw gives in great detail the differences between the two standards which gives the argument validity. He also clearly explains who and just how this change can be benefit to society. Most importantly he goes into detail in regards to the elimination of LIFO which interests our company. In the last article written by Paul Pactor he stresses that the most convenient and efficient way to create a unified set of standards is to replace GAAP with IFRS. Since nothing is set in stone this could be a possibility some day in the future which gives even more reason to follow how this story will unfold and keep up with new standards.

Through out of all of the three sources one common underlying theme was that this convergence is needed and highly important to the accounting world. All authors agreed that there are various benefits that will result from making this merger, however some people will be left dissatisfied or uninterested. The last similarity was that the FASB and IASB have taken small steps towards working out the various issues so that all standards can be joined to make one commonly followed principle. Bringingshaw differed from the FASB and Paul Pactor in terms that he addressed the pros and benefits of outright replacing GAAP with IFRS. He believes that this is the path we are heading in and will be the most successful. Paul Pactor addressed details of the merger but offered his own opinion that adopting IFRS is the most beneficial decision the boards can make. Self-Review Statement of Purpose: You requested that I delve further into recent issues that our accounting sector may be facing or will be facing in the future. I have gathered the following information for the most important issue I found which is the conjunction of the two regularly followed accounting standards, IFRS and GAAP. Background: I chose to put the background information in its own section titled What is IFRS and GAAP because I believe that this information was too lengthy to put in a general introduction and was easier to understand when allowing the reader to comprehend it exclusively. Preview: The following memo will highlight background information on the two practices, prove why this change is important to us, explain what progress has been made in the change, and provide reasons why we should alter to our inventory costing system. Ideas for section headings: I chose to follow a question format excluding the introduction because I think it draws the reader in, and keeps the focus on the point that I am trying to solve an issue and provide solutions. Similarities: I proved similarity between the sources by identifying that all three agreed on one topic at hand which is the reconciliation of differences in the standards. Differences: One instance in particular I chose to add that Pacter offered his personal opinion which differed from the facts that were presented in the other articles. Connecting sources: I believe that I connected the sources by offering what each article had to say regarding the specific subject and acknowledging that they had similar ideas. Course of Action: My suggested plan of action was to offer an immediate change and suggest that we follow this case clearly so that are company can grow with the changing times. I made it aware that we should call a meeting to further discuss this issue and that I would be contacting everyone further.